MANY experts told us 2012 would be a disastrous year for investors but markets have somehow avoided a meltdown.

Share values and house prices remained surprisingly steady, despite the long-running eurozone crisis and fears over the US and Chinese economies.

But there was little good news for savers and pensioners, as rates on cash and annuities went from bad to worse.

So what does 2013 have in store for us, and where should you be investing?

Stocks and shares

Many analysts were expecting 2012 to be a bloodbath for stock markets, with some even predicting the UK’s benchmark FTSE 100 index could crash to 4,000.

However, share prices have been remarkably resilient, says Richard Hunter, head of UK equities at adviser Hargreaves Lansdown.

“The FTSE 100 has ended the year 6 per cent higher at around 5900. The average FTSE company offers a dividend yield of 3.7 per cent, providing a total return of nearly 10 per cent.

“Given all the economic worries, that isn’t a bad return.”

That is mostly thanks to central bankers in the United States, UK and elsewhere printing yet more virtual money via quantitative easing, rather than a sign that the global economy is bouncing back.

Hunter says the biggest worry for 2013 is the so-called US fiscal cliff, a wall of tax hikes and spending cuts set to take effect at the end of the year that could wipe up to 4 per cent from the US economy, plunging it back into recession.

But if Democratic and Republican politicians can strike a deal to soften the blow, markets should enjoy a flying start to 2013.

“That would give companies the confidence to start investing again, which would create jobs and boost the US housing market, and the UK would also feel the benefit,” Hunter says.

The UK’s FTSE 100 index should continue to grow slowly next year, says Mick Gilligan, head of research at stockbroker Killik & Co. “There are plenty of headwinds but we expect the FTSE to grow around 10 per cent to 6,500, due to strong company balance sheets, attractive dividend yields and reasonable valuations.”

Gilligan recommends two UK funds, the iShares FTSE 100 ETF, a low-cost tracker, and Investec UK Smaller Companies, for investors willing to take on a little higher risk.

“We hope to see some growth boosting European share prices, which are trading at a sizeable discount to other regions,” he says.

If you are willing to take a gamble on the European recovery, Gutteridge recommends two funds, Henderson European Growth and Threadneedle European Select.

“These are lower-risk funds because they mostly invest in larger, stronger companies. If you are willing to take more risk in the hope of a higher return, we recommend BlackRock European Dynamic.”

Japan could be next year’s surprise package, following the recent landslide victory for the Liberal Democratic Party, which has promised to boost the stagnant Japanese economy. Killik & Co recommends investment fund Neptune Japan Opportunities (see box, right, for more fund tips).

Remember, stock markets are almost impossible to call. One year ago, analysts were wrongly predicting disaster. Now they are cautiously optimistic. Let’s all hope that this time they’re right.

There are plenty of headwinds but we expect the FTSE to grow

Savings

2012 was another hellish year for savers, with the Bank of England continuing to hold base rates at their record low of 0.5 per cent.

Worse, banks and building societies have now started to slash their savings rates, says Anna Bowes at savings rate tracking service Savings Champion.

“Savers could get as much as 3.25 per cent on instant access in the summer but the best-buy account now pays just 2.35 per cent, from the Post Office, which includes a 0.7 per cent bonus that expires after 12 months.”

Even though inflation did fall over the year, from 3.6 per cent to 2.7 per cent according to the consumer prices index (CPI), not a single variable-rate account beats inflation after tax.

Worryingly, next year doesn’t look any better, Bowes adds.

“There’s still no sign of any rise in the base rate and we are starting to see a trickle of savings rate reductions instead. The big worry is that this trickle will become a torrent.”

Savers should fight back by keeping their eye on the latest best-buy tables and making use of their tax-free cash Isa (individual savings account) allowance, which currently lets you save £5,640 a year and take the interest free of income tax. From April 6, 2013, that will rise to £5,760.

Cash Isas still offer a beacon of hope for taxpayers, Bowes says. “The best easy-access cash Isa is 2.65 per cent from Teachers Building Society.

“Coventry Building Society is currently offering 3.1 per cent on its 60 Day Notice Isa.”

Annuities

It has been another desperate year for pensioners, as annuity rates continue to tumble, says Andrew Tully, pensions technical director at MGM Advantage.

“Quantitative easing has driven down the yields on UK gilts to historic lows and taken annuity rates with them. EU regulations and the fact we are all living longer have also driven down rates.”

A 65-year-old single man with £100,000 on his pension can get a maximum income of just £5,800 a year.

He would get even less if he wanted a joint income to cover his partner, and less still if he wanted that to rise in line with inflation. Things may get worse for men under new European rules that ban insurers from basing annuity rates on gender.

From December 21, men and women must be treated the same, which is bad news for males, who previously got higher income because their life expectancy was lower.

“Annuity rates are likely to be fairly volatile in the first few months of 2013, as insurers react to the EU changes. They might even edge up, but only for a short period,” says Tully.

The outlook for annuity rates remains grim, with interest rates set to stay low and life expectancy rising.

The average lifespan for a man has increased by 10 years over the last 50 years, latest figures show.

Yet there is a massive difference between the best and worst annuities, Tully says. “Shop around for the best annuity at retirement, rather than simply buying the one offered by your pension company.

“If you smoke or drink heavily, have health problems, or are obese, ask if you qualify for an enhanced annuity. These pay up to 40 per cent more income because your life expectancy is shorter.”

A triple whammy of low annuity and savings rates, plus stubbornly high inflation, means life is likely to remain tough for older people in the near future.